Shift in Scrutiny of Loan Servicers

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The U.S. Department of Education is planning to change how it evaluates the companies that manage the loan payments of the more than 26 million borrowers of federal direct student loans.

Department officials are “in the final stages of developing revised performance metrics” for the companies and other entities that service federal loans on behalf of the government, Thomas P. Skelly, the department’s acting chief financial officer, wrote late last month in a letter to Congressional lawmakers.

The letter outlines the department’s multiyear plan to create performance metrics and pricing models that are uniform across the department’s four main servicers and the secondary handful of servicers who each manage far fewer accounts. The department is also “re-examining” how it pays its servicers, Skelly wrote.

Consumer advocates and some members of Congress have said they are concerned that the Education Department does not properly oversee its contracted loan servicers and that the companies are not doing enough to help struggling borrowers.

A top Education Department official last month defended the agency’s oversight of those companies, including Sallie Mae, to the Senate education committee last month.

The department has said that its current approach, in which contractors compete among themselves for a share of the new borrower accounts, is a good one.

“We strongly believe that competition among a small group of experience, highly qualified servicers -- whether for-profit or not-for-profit -- is the best way to drive improved performance and value for taxpayers,” Skelly wrote in the letter.

Under the current performance metrics, the four main loan servicers -- Sallie Mae, PHEAA, Nelnet and Great Lakes Higher Education Corp. -- received new borrower accounts to service based on how they score, relative to each other, on two default metrics and three customer satisfaction surveys.

Deanne Loonin, who represents low-income student loan borrowers as a staff lawyer at the National Consumer Law Center, said that it is “promising” that the department is looking at how to improve its oversight of student loan servicers.

Still, she said, the department’s approach to loan servicing remains “troubling” because it is, in large part “cloaked in secrecy.” She said the department should release more complete information about how its loan servicers are performing.

“How much of this review process will be public?” she continued. “It is not just the outcomes we are concerned about, but the opaque process.”

A department spokeswoman said in an email that its officials would use the feedback they receive from frequent meetings with students and student groups to inform their negotiations with the loan servicers over the new performance metrics.

She did not say whether the department had consulted or planned to consult with students or consumer advocates about developing the new metrics.

Loonin and others have also pushed to allow borrowers to switch their loan servicers if they are not satisfied with the service.

“In general when you think of competition, you think of consumer choice,” she said. “Is this going to be a behind-the-scenes competition with the servicers and the department, or will they somehow let borrowers choose?”

The department recently took that approach with a small population of borrowers seeking a direct consolidation loan. A spokeswoman said Thursday that the department would assess the effectiveness of that approach as it considers changes to the loan servicing contracts.

The new performance metrics will be finalized later this year, the department said.